August 10, 2016

Iran’s weak economic growth undermines supporters of engagement

President Rouhani won the presidency of his country under a campaign which promised to improve Iran’s economy and increase the standard of living of its people. This promise was grounded in another promise, to negotiate a deal with the United States which would end a decade’s worth of economic sanctions; as a result the fate of the Rouhani administration is intertwined with Iran’s economy, one of the primary determinants of whether he will be reelected. With elections scheduled for May 2017, the future of Iran’s domestic politics, and in turn the possibility of improved relations with the U.S. rests on whether Iran will experience tangible economic growth within the next eight months.
The absence of foreign investment has become a focal point for domestic opponents of the Rouhani administration, such as anti-deal spokesperson for the hardline-Committee to Protect Iran’s Interest Alireza Mataji who has recently remarked that “The deal was clinched without Iran receiving any advantage, or even without the other party making any commitment to lift the sanctions,” in reference to the lack of foreign investment in Iran’s economy. A recent example of sanctions relief shortcoming was Secretary Kerry’s announcement in April that Iran has only acquired less than $3 billion of its estimated $55 billion in offshore assets unfrozen by the agreement. And though Iran has obtained more since April, severe obstacles still exist as indicated by President Rouhani’s recent comment that “Iran still cannot access its foreign assets, although it is able to export more oil and access the international banking system.”
While the U.S. has abided by its commitments to waive nuclear-related sanctions, remaining sanctions and in particular sanctions on the use of the U.S. dollar have limited financing options for the many corporations interested in doing business with Iran. Iran has signed trade agreements with Italy, Japan, South Korea, and Germany, but banks have shied away from providing the funding which provides the crucial difference between a financial agreement in principle and a financial deal in practice, as a variety of non-U.S. trade deals are ultimately made in U.S. dollars.
Another reason for Iran’s continued economic malaise is Europe’s fears that sanctions that were lifted by the JCPOA could be reinstituted by the U.S. at some later point. This has persisted despite the Department of State’s recent efforts to restore confidence in European corporations interested in legitimate trade with Iran.
To make matters worse, hawks in the U.S. Congress have threatened to sabotage trade with Iran that was made permissible under the terms of the nuclear deal. The U.S. has committed itself under the terms of the JCPOA to lift restrictions on sales of commercial aircraft to Iran to restore its decades-old commercial fleet. Instead, hawks in Congress have authored several bills aimed at blocking a 25 billion dollar sale between Boeing and Iran Air. While the House has passed such legislation, it is unlikely to clear the Senate. But the effort alone provides further anxiety for companies considering whether to deal with Iran and provides fodder for hardliners in Iran to attack the Rouhani administration.
The Iranian economy has nevertheless improved in measurable ways since the sanctions were lifted, primarily the result of Iran’s return to the oil and gas markets. The Iranian oil industry has worked tirelessly in order to regain market share lost since 2011 and has regained 80% of its former share according to the National Iranian Oil Company. This has driven a sharp rise in Iran’s expected GDP growth for 2016, between 4% and 5.5% currently as opposed to the International Monetary Fund’s (IMF) earlier prediction of 1.3% growth prior to sanctions being lifted. However even the oil front has proven to not be as promising as expected. While the Ahmadinejad administration was able to weather U.S. sanctions due to record high oil prices, Rouhani has not been as fortunate with oil prices>reaching a twelve year low of under $30 a barrel.
However, because the growth is concentrated in Iran’s oil and gas industry, it has not put a dent in Iran’s chronic 24% youth and 11% general unemployment rate.  This could prove to become the Rouhani administration’s Achilles heel as the unemployment rate is the primary measure, aside from the price of consumer goods, by which many will gauge the success and ultimate value of the nuclear deal.
The current level of expected growth, coupled with the administration’s success in taming inflation – which has dropped to single digits for the first time in 25 years – will eventually increase the standard of living for Iranians who are employed. However, it is unclear whether the government can make additional moves to ensure the millions of unemployed and underemployed Iranians receive the full benefit of the recovery. For that to happen, Iran will need to see more gains in reconnecting to the global economy.
The Rouhani administration’s ability to lift sanctions in return for severely downscaling Iran’s nuclear program has proven to be more successful in some areas of the economy than others. Overall, Iranians appear to still be in favor of the deal, although the general level of the approval has sharply dropped as a result of the aforementioned difficulties. Hardliners in Iran will without a doubt use this to their advantage during Iran’s campaign season, which will carry more weight if the status quo persists. The U.S. ought to lay out a plan to further facilitate sanctions relief; opting for inaction would be a boon for Iranian hardliners, increasing the likelihood that an anti-diplomacy, anti-deal administration takes hold in next year’s elections.

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